NPEs in Europe: A helping hand?

Daniel Papst argues that Non-Practicing Entities have a valid role to play in the European patent market, helping small and medium-sized businesses to monetize their inventions.

While Non-Practicing (patent holding) Entities (NPEs), also known as Patent Assertion Entities (PAEs), have existed in the US for decades, in Europe most NPEs are a relatively new phenomenon. There are several reasons for this, not the least of which is the nature of European courts and a differing business culture that is less confrontational. While not as litigation adverse as the Japanese, Europeans have been somewhat late to the game when it comes to patent monetization. However, there are indications that some European NPEs, while lower profile, have been quite successful not only in Europe but also in the US and Asia.

In order to determine why NPEs appeared on the IP scene some basic facts have to be laid out. A myriad of single inventors, small innovative companies, universities, and also large corporations are engaged in research and development activities resulting in valid patents based on their own inventiveness. While single inventors, small companies, and universities mostly do not have access to the resources needed for bringing a product to market (experienced personnel, business know-how, time and capital), large corporations also sometimes choose not to manufacture and/or sell products or offer services claimed in their patents. They sometimes choose to abandon a field of technology and discontinue competing with products in the market or, having created a valuable portfolio of patents, are purchased by another corporation. Operating companies sometimes buy patents from third parties for defensive or counter-assertion reasons.

In the age of globalization it has become extremely difficult for the individual to take the legal steps available against the unauthorized use of their innovation. Even if the infringement is inadvertent, it still amounts to a misappropriation. Once a patented invention has established itself on the world market its illegal use quickly becomes common. While the infringer of a patent enjoys the benefits from the illegal use of a new invention, the inventor is left empty-handed – that is if they has not (or cannot) actively asserted their rights. In most instances, this is the case. Given the nature of global production and worldwide trading, it is virtually impossible for the patent holder to even identify the party infringing the patent. Many businesses simply do not have the capital, time and know-how to enforce their rights internationally, let alone locally. If they nevertheless attempt to do so, there is a high risk that, after a lengthy, distracting and expensive dispute, frequently with well-capitalized global players, they will have to resign themselves to giving up. In addition, complex questions are posed by global markets, such as who are the infringing manufacturers in question, where and what do they produce and sell, and which patents are affected in particular countries? Finally, where and to whom are the infringed patents best licensed or enforced?

Patent infringements must be actively pursued to insure that a patent holder can successfully reap the benefits of their patent rights and to keep innovation at the leading edge. Otherwise, why bother to innovate if infringers can readily misappropriate an invention without penalty? The objective of sharing the fruits of a monetization program with the original holder of the patent is a motivation for most NPEs pursuing patent infringements. Granting licenses has significant advantages over pursuing an injunction once a technology has been successfully launched in the market. It then often makes more sense in economic terms to participate in the success of an operating company than to have a monopoly situation imposed through the legal system.

Forum shopping: US v Europe

Because of differing legal systems in the US and Europe NPEs must now choose more consciously in which country to enforce their rights. Just seven years back most people trying to enforce a patent family (US, EP) would have said it is obvious to pursue enforcement activities in the US. Given the single biggest consumer market covered by one patent and the legal remedies in case of success (automatic injunction, chance for treble damages) outweighed the significant litigation costs, which could be 5 to 10 times more than at a European court and the rather lengthy proceedings. The situation in the US has changed though.

Patent litigation trends in the US

Recently, the US Supreme Court issued a number of rulings that have curbed some of the leverage NPEs can wield when attempting to monetize their patents in the US.

The 2006 decision in eBay v MercExchange made it much more difficult for NPE patent holders to receive injunctions by establishing a four-part test to determine whether an injunction is warranted. In MedImmune v Genentech (2007), the Court ruled a licensee is not required to terminate its license agreement before seeking a declaratory judgment to determine whether the subject patent is invalid, unenforceable, or not infringed. Hence, it is easier for alleged infringers to challenge the validity of patents, while maintaining their license rights.

In April 2007, the Court went further in KSR International v Teleflex, raising the bar for patent holders to prove their inventions are non-obvious. The ruling made many existing patents more vulnerable to litigation – particularly if they represent incremental improvements or combinations of prior elements – and may also make new patents harder to get. Finally, in the matter of Bilski and the US Patent and Trademark Office, concerning whether business methods are patentable subject matter and under what conditions, the IP community is severely impacted by the given outcome.

A different situation in Europe

The Unitary European Patent will offer the option of truly covering European countries with one patent at reasonable expense, while there is now an agreement on establishing the Unified European Patent Court. At present though, the so- called European Patent once granted disintegrates into separate national parts. As a consequence, patent litigation is national as well as “European”. Despite stemming from the same European Patent, in practice the respective parts have to be litigated separately in each country in which it was nationalized. Mostly this does not happen because the parties in dispute settle after having litigated in one or two countries.

Even the claim scope of a European patent can vary in different countries, due to factors like distinct national rules with respect to applicable prior art. Patent holders therefore can face different claim scopes in different countries even though the claims are originating from a single European patent.

European v US NPEs

How do European NPEs differ from those in the US? For one, they have kept a lower profile and have not published a lot outside of Europe. With respect to European NPEs that actively enforce infringed patents (IPCom, Sisvel, Papst Licensing) they certainly choose more carefully where to assert their rights. IPCom and Sisvel very consciously chose Germany as their venue to litigate, respectively enforcing their cases despite patent portfolios that comprised US patents as well. Papst Licensing, whenever negotiations do not resolve an infringement matter with European, American, or Asian infringers, is equally active in courts in the US as well as in Europe, and especially Germany.

The market for patent transactions in Europe though is still significantly less developed as compared to the US, but it is becoming more and more open for NPEs. In general there seems to be a focus on quality patents among the European NPEs. The goal for most of them is not to threaten an infringer and collect a litigation avoidance fee, but instead to participate in the success of a valuable technology covered by the patent they monetize and license out.

In order to identify a patent family worth monetizing a thorough due diligence process is essential. First of all, it is crucial to verify that respective patent claims read on infringing products. In parallel, extensive prior art searches will be carried out to investigate the patent claims validity. Having assessed the technology, the main focus is on the companies potentially involved in the infringements, and the markets they are selling their products to – locally and also quantitatively, including where the product is made, as well as where it is sold world wide.

So far, NPEs in the US seem to have only taken a look at the US as their stage, while the European’s NPEs may have come to the game later but have taken a broader view.

Conclusion

Just as markets for intangibles like capital, debt, and risk have evolved over the past hundred years, a market for patent assets has also developed. The emergence of patent monetization companies in Europe, to compliment those already established in the US, is a sign of progress in the idea of innovation as a financial asset.

Independent patent owners function as market intermediaries, and by doing so, they increase patent liquidity, set market clearing prices, and foster efficiency in the IP economy. Good patents used fairly facilitate invention and have a positive impact on innovation. Weakening patents is likely to weaken innovation too. The often single sided dialogue about NPEs, motivated in part by self-interest of companies who may be infringers, serves to undermine an increasingly global and intangible-asset driven knowledge-based economy.

Résumé

Daniel Papst is one of the Managing Directors of Papst Licensing. Hegraduated from the University of Karlsruhe, Germany in electrical engineering and information technology with a focus on electric drives and power electronics in 2000, earning a Dipl-Ing degree. As an intern at the Chicago IP boutique Welsh & Katz Ltd. he gained patent law experience in the US. Mr Papst has started out at an IP law firm in Munich, Germany. Being a licensed German patent attorney since 2005 he joined Papst Licensing operatively in that same year. In 2009 Mr Papst became one of the Managing Directors of Papst Licensing. He currently is a member of AIPPI, VPP, LES, INTIPSA and IEEE.

Papst Licensing GmbH & Co. KG was established in 1992 by its founder Georg Papst, Daniel’s deceased father and is owned by him and his two brothers. Papst Licensing makes available to small and medium-sized businesses the ability to participate in the world patent monetization and licensing market.